Spurious Relationships for Nearly Non-Stationary Series

• Main Authors: Yushan Cheng, Yongchang Hui, Michael McAleer, Wing-Keung Wong
• Format: Article
• Language: English
• Published: MDPI AG 2021-08-01
• Series: Journal of Risk and Financial Management
• Subjects: cointegration; stationarity; non-stationarity; spurious problem; nearly non-stationarity
• Online Access: https://www.mdpi.com/1911-8074/14/8/366

Literature shows that the regression of independent and (nearly) nonstationary time series could result in spurious outcomes. In this paper, we conjecture that under some situations, the regression of two independent and nearly non-stationary series does not have any spurious problem at all. To check whether our conjecture holds, we set up several situations and conduct simulations to justify our conjecture. Our simulations show that under some situations, the chance that the regressions being spurious is very high for all the cases simulated in our paper. Nonetheless, under some other situations, our simulation shows that the rejection rates are much smaller than the 5% level of significance for all the cases simulated in our paper, implying that our conjecture could hold under some situations that regression of two independent and nearly non-stationary series does not have any spurious problem at all.